FSI Brief Examines Regulatory Responses to COVID-19 Pandemic
FSI published a brief on regulatory responses, within the global financial system, to the COVID-19 pandemic. The brief takes stock of the types of financial measures that have been implemented and the rationale for implementation of these measures, along with their pros and cons. It addresses these aspects of policy response based on a simple framework and a set of principles that can guide the assessment. The brief explains that regulatory policy responses should seek to support economic activity while preserving soundness of the financial system while ensuring transparency.
Since the start of the COVID-19 crisis, prudential and related authorities have implemented a number of measures to support the supply of credit to the economy. The authors highlight that the objectives of financial policies should influence the type and extent of the adjustments. A solid and sound financial system is a prerequisite for sustainable growth. Asymmetric policies that simply ease standards in bad times but do not tighten them in good times could generate excessive risk-taking in the long run. This suggests three principles that could guide the assessment of the adjustments:
- The adjustments should be effective in supporting economic activity. This should apply at least to the crisis period, and preferably even beyond, when establishing the basis for a solid recovery.
- The adjustments should preserve the health of the banking (financial) system. Banks should remain sufficiently well-capitalized, liquid, and profitable to underpin sustainable growth.
- The adjustments should not undermine the long-run credibility of financial policies. Credibility is hard to gain and easy to lose. Compromising the policies excessively in the short run can create serious long-term damage. From this perspective, adjustments should be temporary. Transparency is key in meeting this principle.
The authors have highlighted that the recommendation for banks to make full use of capital and liquidity buffers should go hand in hand with restrictions on dividends and bonuses and clarity concerning the process for rebuilding them. Flexibility in loan classification criteria for prudential and accounting purposes should be complemented with sufficient disclosure on the criteria banks use to assess creditworthiness. The publication of detailed guidance on the application of expected loss provisioning rules, combined with sensible transitional arrangements, may constitute a balanced approach to mitigating the unintended effects of the new accounting standards.
Related Links
Keywords: International, Banking, Accounting, COVID-19, Liquidity Buffer, Transparency, Disclosures, Basel III, Regulatory Capital, Expected Credit Loss, IFRS 9, FSI, BIS
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Related Articles
ESAs Issue Multiple Regulatory Updates for Financial Sector Entities
The three European Supervisory Authorities (ESAs) issued a letter to inform about delay in the Sustainable Finance Disclosure Regulation (SFDR) mandate, along with a Call for Evidence on greenwashing practices.
FSB and NGFS Publish Initial Findings from Climate Scenario Analyses
The Financial Stability Board (FSB) and the Network for Greening the Financial System (NGFS) published a joint report that outlines the initial findings from climate scenario analyses undertaken by financial authorities to assess climate-related financial risks.
FSB Issues Reports on NBFI and Liquidity in Government Bonds
The Financial Stability Board (FSB) published a letter intended for the G20 leaders, highlighting the work that it will undertake under the Indian G20 Presidency in 2023 to strengthen resilience of the financial system.
ISSB Makes Announcements at COP27; IASB to Propose IFRS 9 Amendments
The International Sustainability Standards Board (ISSB) of the IFRS Foundations made several announcements at COP27 and with respect to its work on the sustainability standards.
IOSCO Prioritizes Green Disclosures, Greenwashing, and Carbon Markets
The International Organization for Securities Commissions (IOSCO), at COP27, outlined the regulatory priorities for sustainability disclosures, mitigation of greenwashing, and promotion of integrity in carbon markets.
EBA Finalizes Methodology for Stress Tests, Issues Other Updates
The European Banking Authority (EBA) issued a statement in the context of COP27, clarified the operationalization of intermediate EU parent undertakings (IPUs) of third-country groups
EU Finalizes Rules Under Crowdfunding Service Providers Regulation
The European Union has finalized and published, in the Official Journal of the European Union, a set of 13 Delegated and Implementing Regulations applicable to the European crowdfunding service providers.
OSFI Sets Out Work Priorities and Reporting Updates for Banks
The Office of the Superintendent of Financial Institutions (OSFI) published an annual report on its activities, a report on forward-looking work.
APRA Finalizes Changes to Capital Framework, Issues Other Updates
The Australian Prudential Regulation Authority (APRA) finalized amendments to the capital framework, announced a review of the prudential framework for groups.
BIS Hub and Central Banks Conduct CBDC and DeFI Pilots
The Bank for International Settlements (BIS) Innovation Hubs and several central banks are working together on various central bank digital currency (CBDC) pilots.
